Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
TRI’s dividend Growth Score is 32, suggesting that the company’s dividend growth potential is below average. The company’s score was reduced because of its above-average payout ratios, very low organic sales growth, and stretched balance sheet.
Thomson Reuters Corp (NYSE:TRI) targets a dividend payout ratio of 40% to 50% of its annual free cash flow and, assuming management hits its 2015 free cash flow guidance, the company is meaningfully above that range currently (closer to 60%). However, free cash flow available to shareholders should improve as TRI’s spending on acquisitions remains much lower than it has been historically.
As seen below, the company’s dividend has grown at a 2-3% annual rate over the last five years, and we wouldn’t be surprised to see 1-3% annual growth continue until business growth accelerates.
Source: Simply Safe Dividends
While TRI’s dividend growth rate is far from remarkable, it has been consistent. The company has paid out dividends consistently for over 30 years and increased its dividend for 22 consecutive years.
TRI is not eligible to join the S&P Dividend Aristocrats Index because it’s not a member of the S&P 500, but it has been an extremely reliable dividend grower.
Valuation
Thomson Reuters Corp (NYSE:TRI) trades at 16x forward earnings and offers a dividend yield of 3.6%, which is lower than its five year average dividend yield of 3.9% but still represents solid income for investors living off dividends in retirement.
For a company with substantial recurring revenue, strong free cash flow generation, and reasonable business trends, the company’s earnings multiple appears very reasonable.
If management can start generating 2-4% organic growth and high-single digit earnings growth in the next several years, the stock looks to have great value today and appears to offer 9-12% annual total return potential.
Conclusion
TRI shares many characteristics with our favorite blue chip dividend stocks. The company has a long history of strong profitability and dependable dividend increases, almost all of its revenue is recurring, and management is taking action to make the company more competitive for years to come.
While TRI’s dividend growth rate is fairly low, its 3.6% dividend yield appears to be a very reliable source of income. Should management continue executing the turnaround plan and rejuvenate earnings growth, we think dividend growth could also improve over the next five years.
Disclosure: None
